As bitcoin (BTC) becomes more accessible, conditions for the robustness and health of the Bitcoin network improve. This is one of the conclusions of the study Drivers of the value of Bitcoin, published last week by the Bitstamp exchange.
The report, which featured input from digital asset data provider for institutional investors, ByteTree, addresses the comparison between bitcoin and various asset categories, including stocks and gold. It also examines the risk characteristics of bitcoin and an alternative model to understand the value of that cryptocurrency.
ByteTree co-founder and chief investment officer, Charlie Morris, argues that the analysis of the price of an asset in the market does not only depend on its fundamental parameters, as external factors would also play a role.
Morris notes that “bitcoin likes easy money,” referring to central banks’ “quantitative easing” (QE) policies in response to the global health crisis. These policies include low-interest rates and important fiat money issues, such as the dollar or euro.
To summarize this relationship of bitcoin versus QE policies, Morris argues that the following graph shows contrasts of the price of bitcoin with the joint balance sheet of four major central banks. They are the Federal Reserve (the FED) of the United States, the Bank of Japan, the European Central Bank, and the People’s Bank of China.
Between April and June of this year, the balance sheets of these four major central banks increased by more than $ 4 trillion, from approximately $ 22.5 trillion to $ 27.6 trillion.
On the other hand, Bitcoin, along with the rest of the markets, registered a significant fall on March 12, although it later experienced a moderate recovery. At the end of July, bitcoin experienced a major rally, staying highly above $ 10,000 since that date.
A new institutional investment decision, Square’s purchase of $ 50 million in bitcoin, took the price above $ 11,000 this week.
Regarding the relationship between bitcoin and the US dollar, the report indicates that the Fed’s monetary policies have weakened the dollar, but that the influence of this fall is not so decisive in the price of bitcoin.
If the dollar falls, the report says, it is logical that the price of an asset in dollars should rise, or vice versa. “But this obvious fact has a small impact because the movements of the Forex market are small compared to those of the bitcoin market.”
The average volatility of the USDX index reflects the strength of the dollar against a basket of rival currencies, from 2015 to the present, which is 6%. According to the study, the average volatility of bitcoin in the same period is 60%.
There are two aspects that the report highlights: the relationship between bitcoin and the assets most associated with risk, and the relationship of the cryptocurrency with assets directly linked to social networks, on the other. About the risk, the study authors chose the relationship between stocks and bonds as an indicator of risk conditions, since the latter is traditionally more stable.
By: Jenson Nuñez.